The domestic domain:
the new international policy arena
Sylvia Ostry*
r
By the end of the 1980s, globalization" had become the
term for accelerating interdependence. This third wave of
international linkage, after the expansion of trade and the
internationalization of financial markets, is dominated by
flows of investment and technology and by increased international corporate and research networking. The primary
agent of globalization is the transnational corporation. The
primary driving force is the revolution in information and
communication technologies. Like each phase of tightening
linkage, globalization enhances opportunities for growth
but also increases risk and vulnerability. Growth is enhanced by improved efficiency, more rapid production and
the adoption of new technology. Risk is heightened because
globalization creates growing pressure for convergence of
policies, a pressure which touches the sensitive issue of
sovereignty. In a globalizing world, competition among
transnational corporations in sophisticated products and
services (an increasing proportion of world trade) is also
competition among systems. A globalizing world has a low
tolerance for system divergence-and that is the wellspring
of new sources of international friction, system friction. A
bilateral United States-Japanese approach to resolving system friction can be destabilizing and, while the European
approach to harmonization is desirable, it is unobtainable.
The solution lies in mounting_ an international initiative to
promote the convergence of policies related to innovation
and more balanced access to investment and technology
flows. Most of the policies which will be the subject of this
new international initiative are in the domestic domain: the
new international policy arena.
*Chairperson, Centre for International Studies, University of Toronto, Toronto,
Canada. This article is based on a paper prepared by the author for a symposium organized by OECD in Paris on 30 October 1990.
Transnational Corporations, vol. 1, no. I (February 1992), pp. 7-26.
7
As the world is preparing to move into the twenty-first century, the
arena for international policy cooperation is moving beyond traditional arenas to domestic policies. The basic reason for that shift
lies in changes in the extent and nature of the international linkages
among countries which have produced a new type of friction that
can be called system friction. The struggle over competitiveness in
the Triad (Japan, the United States and the European Community), which has generated the policies targeted at so-called strategic
industries, is a symptom of this far broader malady of system friction. Those developments are briefly described below and the
policy options required to mitigate or contain the new discord are
explored.
International linkage
There have been three phases of growing international linkages among countries since the Second World War. The first, the
golden age of the 1950s and 1960s, was driven by trade, launched
by the dismantling of protectionist barriers in successive GATT
rounds. Over the decade of the 1970s, three massive commodity
and oil shocks initiated the second phase, which was characterized
by financial integration, via the recycling of the OPEC surplus.
The wave of financial integration accelerated in the 1980s, fed by
the revolution of deregulation and privatization in the United
Kingdom and the United States and the emergence of the Japanese current account surplus.
The world is now at the outset of a third phase called globalization, which is led by a surge in foreign direct investment (FDI)
[UNCTC, 1991]. After the Second World War, FDI was characterized by "le defi
"american" in Western Europe. The present upsurge, which began in 1983 and has steadily picked up speed, is
very different in both origin and destination. By 1983 the United
States had become a net recipient of FDI (that is, large outflows
were outweighed by still larger inflows). By 1985, Japan became
the largest net direct investor (owing to large outflows and negligible inflows), followed by the United Kingdom and the Federal
Republic of Germany. Both outward and inward FDI are dominated by the Group of Five-France, Germany, Japan, the
United Kingdom and the United States.
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Apart from the dynamic Asian economies, the developing
countries have been largely excluded from this trend. FDI is much
more concentrated than are trade flows: the Group of Five
accounts for over 75 per cent of FDI, but just over 40 per cent of world trade. If present investment flows are extrapolated, a conservative estimate suggests that they will grow at twice the rate of
trade flows in the 1990s.
The prime agent of this third phase is the transnational corporation (TNC). TNCs have a variety of objectives and rarely make
decisions on the basis of only one consideration. One important
factor driving globalization today, however, is the increase in
research-and-development (R&D) costs produced by the race for
the technological frontier in leading-edge sectors. That has stimulated not only a wave of international mergers and acquisitions (the
major form of FDI), but has also spawned an array of new forms
of international networking among TNCs, including R&D/technology alliances. This technology networking has become so
prominent as to deserve a new term: technoglobalism. It is even
more concentrated than investment: over 90 per cent of the technology agreements are made between companies with their home base
in the Triad.
So the third phase of international linkage is centred on capital
and technology flows. To a considerable degree, it has tended to
exclude the non-OECD countries.
While it is convenient to delineate those three phases of international linkages chronologically, it is important to stress that they
are not separate and independent of each other, but rather closely
interrelated in a complex fashion. Particularly striking, for example, is the relationship between investment and trade. Thus a large
and growing proportion of world trade involves intra-enterprise
trade. For Japan and the United States, for example, trade related
to FDI now accounts for over half of the total trade flows.
Further, another manifestation of growing international linkages has been the changing nature of trade itself: an increasing proportion of trade among industrialized countries is in technologically
sophisticated manufactured products produced by large firms
operating in imperfectly competitive markets. In the 20 years beTransnational Corporations, vol. I no. I
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tween 1966 and 1986, high-technology goods climbed from 14 per
cent to 22 per cent of world manufacturing exports. And, finally,
over the same period, powerful new players have entered the global
arena, most importantly Japan.
Indeed, it has been the concern over the Japanese growth model
and the role played by targeting so-called strategic sectors and technologies that have made competitiveness such a high-profile issue in
the Triad. Early in the 1980s, the conflict with Japan centred on
asymmetry of import access to the Japanese market. While that is
still an issue, the targeting debate has widened to a concern about
policies allegedly designed to create competitive advantage. While
the debate about Japanese targeting is by no means settled, the most
important new development during the 1980s has been the "policy
spillover" involving various kinds of support for strategic sectors in
the other two Triad-members. In addition to those new forms of
government intervention, changes have also taken place in the discipline of economics-the climate of ideas-which have undermined
the liberal orthodoxy concerning the role of markets versus Governments, in both trade and industrial policy, for leading-edge, hightechnology industries.'
Thus, in sum, changes in a transformed and far more interdependent international economy have spawned the new international
friction manifested in the struggle over leading-edge sectors and technologies, but reflecting also a much more pervasive phenomenon of
system friction. The reason is that the battle for market share in leading-edge sectors involves not only competition among TNCs, but
rivalry among the different market systems which influence the ability of an enterprise to compete.
System friction
Economists have long ignored cultural, historical or institutional
differences as factors of significance in market analysis. While interest in international economics has greatly increased, international
forecasting models, for example, are based on the assumption that
For an account of policy developments and of the new international trade theory in
this context, see Ostry (1990), chapter 3.
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there is only one market model and thus the different "country
blocks" all have identical structural properties.
More recently, however, some economists have urged that a better understanding of institutional (including regulatory) differences
among countries may be significant, though it may be difficult to incorporate them into theoretical or econometric modelling. One reason for that changing view in the early 1980s was the markedly different reaction, within OECD, to the second OPEC oil shock [Ostry
and Koromzay, 1982]. A more important reason for the interest in
different system properties, however, was the debate over competitiveness and the challenge of Japan, which stimulated a vast outpouring of analysis of the Japanese paradigm of successful innovation. 2 Indeed, in the analysis of the innovation process more
generally, the importance of institutional factors has been
i ncreasingly highlighted [Dosi, 1988]. 3
It is clearly beyond the scope of the present article to describe in
any detail the burgeoning literature on institutional differences
within the Triad. A highly stylized depiction would distinguish three
dominant models:
• The United States paradigm of a #uralist market economy
with its aggressive financial markets is strongly consumerand short-term oriented. Its strength is dynamism and flexibility. Its dominant ethos is private-sector competition and
minimal government. But producer interest groups generate
an ad hoc, "implicit" industrial policy response.
•
The Continental European models are variants of the social
market economy and involve more extensive government interaction with the "social partners". "Social market" implies
a recognition of market imperfections and a governmental
responsibility to rectify them as well as to provide public
goods. An elastic definition of "public goods" may sometimes blur the line between the role of the market and the role
of the State.
2
See Ostry (1990), chapter 3, for a select bibliography.
Many of the papers prepared for the OECD Conference on Technology and Economic Policy (TEP) focus on cultural, historical and institutional factors.
3
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r
• The Japanese corporatist market economy is unique in its
long view, in its producer orientation, in its strategic use of
cooperation and competition and blending of macro and
micro policies, in the close and continuing interface of the
State with business and in its remarkable capacity to adapt
to external shock.
In that context, it is useful to distinguish two aspects of those systems: the cultural and historical roots that influence behaviour,
tastes and institutions on the one hand, and government policies
(which, of course, are also affected by the cultural legacy) on the
other. The reason for this distinction is that the appropriate domain
for international policy cooperation is government policy, not
tastes, preferences or behaviour, which should be accepted as
"given", although, of course, not immutable.
As many studies have shown, both cultural legacy and government policy affect the competitiveness of the firm. Fundamental to
competitiveness is innovation: the search, development and adoption of new products and processes. Innovation stems from the interaction between capabilities within the firm and industry and its
external environment, aj„ omnibus term which comprises government policy (R&D, education, macro policy, trade policy, investment policy, competition policy, capital market regulation etc.) and
behavioural phenomena, such as the tastes and attitudes of consumers, workers, entrepreneurs etc . 4
One of the more important insights that is emerging from studies
of the innovation process is that some national systems are more
consonant (system friendly) with particular technological paradigms
than others. An example is the United States leadership, which dates
from the end of the nineteenth century and is based on the Fordist
paradigm of mass production [Nelson, 1990]; Japan is more system
friendly to the more flexible manufacturing paradigm of electronicsbased technology [Freeman, 1987, pp. 55-90]. But systems can adapt
and, indeed, the process of market competition is one major transmission mechanism of adaptation. Moreover, expanded international linkages (especially through FDI) and the revolution in
transport, information and communication technologies also create
4
12
See Dosi (1988), for a literature survey and bibliography.
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pressures for adaptation and a momentum to convergence that goes
well beyond the organization and behaviour of the firm.
There are many who would argue that competition among firms
and a gradual process of system convergence are both necessary and
sufficient to sustain the health of the world economy as long as
Governments refrain from self-defeating protectionist or interventionist policies. But, as pointed out above, the competitiveness of the
firm depends not only on its own competitive strength, but also on
the interaction of its capabilities with the capabilities of the external
environment in which it operates. Smart firms may have the potential to build superb mousetraps, but not to determine the key policy
and institutional aspects of their external environments [Dosi, 1988,
p. 1,121; Roobeek, 1990].
So competition among firms is also competition among systems;
the slow "natural" process of convergence will produce serious discord-system friction-along the way. A globalizing world has a
low tolerance for system divergence. Continuing instability and
growing pressure for new forms of managed trade are the likely outcomes. But a new approach to mitigating system friction is, in fact,
to undertake an international policy process to promote the convergence of those government policies which are most relevant to the
process of innovation. Most of those policies are domestic: the new
international arena is within the borders of the nation-state.
If a process of international policy cooperation is undertaken to
promote convergence, it is important to ask: convergence to what?
What is the regulatory model to be promoted? As suggested above,
there is no single paradigm "out there". Of course, the overall objective must be to promote convergence towards policies that are compatible with market-oriented outcomes. But, as the following discussion will illustrate, in some policy areas no clear-cut guidelines
emerge. In such cases, the regulatory standards themselves will be an
output of the process of harmonization.
It is instructive to note that two processes of convergence are
now in fact underway in the international economy. The most
advanced-locational competition-is that emerging in Europe,
catalysed by "Europe 1992". The choice laid out in the 1985 White
Paper to base market completion on "mutual recognition" and the
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E01
free flow of mobile factors of production launched a process which
has been described by one analyst as follows [Giersch, 1988, p. 5]:
"competition between different regulatory systems . . . which is
free competition among different locations . . . for internationally mobile resources, such as capital and entrepreneurship and
also labour with a high content of human capital".
The implicit answer to the question "convergence to what?",
given by locational competition, would be that regulatory system
that best reflects the preferences of the mobile resources, especially
capital and entrepreneurship. So locational competition is a marketlike process by which convergence emerges expost, a result of the invisible hand, so to speak. But even in the case of European locational
competition, there will be the need for the visible hand of the Commission in instances of significant divergence of key regulatory instruments, such as competition policy, capital market regulation,
social policy and taxation. This process of ex ante convergence is
likely to prove contentious and difficult-although ultimately successful-because of the enhanced power of Brussels and the considerable political momentum generated by Europe 1992 and the
events in Central and Eastern Europe.
MW
s
The European locational competition process of convergence is
attractive because it involves limited supranational intervention,
thus minimizing political difficulties as well as the high risk of policy
error in a period of rapid change and heightened uncertainty. But it
could not be duplicated at a global-or even an OECD-level at the
present time, not only because the basic conditions of mutual recognition and the free flow of factors do not exist there, but also, and
more importantly, because the diverge,, ices in regulation are wider
(as between Japan, for example, and the United States) and there is
not yet the strong political will at the international level to yield
sovereignty or share power that now exists in Europe.
The other very different process of policy convergence recently
launched is the bilateral United States-Japan "structural impediments initiative" (SII), which covers a vast range of subjectsmacro- and micro-policies, as well as corporate culture and consumer tastes-and is tied to demonstrable results in the bilateral trade
balance. On the micro-policy front, a major issue is the divergence in
competition policy between Japan and the United States. But so
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many other items (both regulatory and cultural) were included in the
United States list of over 200 specific suggestions that it has elicited a
perception from a number of quarters that the Japanese are different
and, therefore, special rules are required only for them. Behind that
lies a quite unacceptable view of convergence of "everything" 5 (to the
American model?). Moreover, another serious danger in SII is that
it is unlikely to produce the desired changes in the bilateral trade balance (which is influenced by many factors unrelated to the negotiations) and thus risks inflaming congressional animosity and increasing the pressure for managed trade arrangements. Finally, a process
of convergence that is bilateral and non-transparent is hardly the
most desirable or effective way of dealing with a fundamental systemic issue.
If the European approach is desirable but unattainable and the
bilateral approach likely risky and potentially destabilizing, the only
feasible alternative for initiating a process of harmonization is to
place the issue in a multilateral forum, which has a representation of
not merely the main players (namely OECD members), but also of
developing countries, which inevitably will be affected by any such
harmonization. The establishment of a policy regime without their
participation will leave a large scope for friction and discord . One
option would be to set up, at OECD (along the lines of the ongoing
"dialogue with the dynamic Asian economies"), a special working
group, which would include OECD countries and selected nonmember countries. Another suggestion could be UNCTC, which
has the secretariat expertise and the mandate to cover the broad
range of policies relevant to the exercise.
Promotion convergence: a post-Uruguay programme
The idea behind the promotion of convergence is an extension of
the multilateral rules-based system, originally designed for international trade, to include domestic rules, which significantly affect
enterprise performance (competitiveness) and market access not
only for goods and services, but also for investment and technology
flows. Since the new international arena has now expanded to
5
See Bhagwati [1989, pp. 45-46], who argues that "if everything becomes a question
of fair trade, the only outcome will be to remove altogether the possibility of ever agreeing
to a rule-oriented trading system".
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,-
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domestic concerns, it would be fairer-and would be seen as fairerif TNCs were to compete under the same set of domestic rules in different countries. Similarly, persistent marked asymmetry of access
for investment and technology will generate serious friction because
broad overall reciprocity is fundamental to sustaining political support for the multilateral system.
There are at least three questions that would have to be confronted if a "post-Uruguay programme" were to be launched:
• What policies will be selected?
• How is convergence to be achieved?
• Will convergence lead to overall reciprocity?
Some answers to these questions are set forth below. But it
should be recognized that what is being proposed is not only a major
new thrust in international policy cooperation, but also an incursion
into contentious analytic territory-broadly the determinants of innovation and thus of competitiveness-where there is considerable
disagreement among economists and policy analysts. Thus the
"answers" should be regarded as proposals for discussion.
What policies?
The major criterion for policy selection is impact on the innovation process, because, for advanced countries, innovation is the primary determinant of competitiveness at the level of the firm and of
rising productivity at the national level. But in the case of some policies of undeniable importance in that context (education and training are the best examples), the international friction stems more
from access or reciprocity issues than from divergence per se (see
below). In others, for example, fiscal policy, while the impact on
innovation via savings, investment and the cost of capital is considerable, there are other forums, specifically Bretton-Woods institutions and the Group of Seven, where a policy coordination process is
already underway. Finally, the Uruguay Round agenda includes a
number of key items central to the innovation process, such as intellectual property, anti-dumping regulations and industrial and agricultural product standards. A successful outcome will lead to the reduction if not the elimination of policy divergence.
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Taking all of this into account, it is proposed that an initial list of
policies for multilateral coordination should include competition
policy, R&D policies, foreign-direct-investment policy and financial
market regulation as it affects corporate governance.
In the case of competition policy, several high-profile issues are
already on the international agenda and provide a useful starting
point. As mentioned above, a number of these were prominent in
SII (vertical arrangements in the Japanese keiretsu, different enforcement procedures in the two countries etc.). The differing treatment of research and production joint arrangements in the United
States, as compared with both Japan and the European Community, has also generated a lively debate in the United States, with a
number of experts in the innovation field arguing in favour of antitrust reforms that go beyond the 1984 National Cooperative
Research Act and others warning of the danger of cartel-like behaviour [Jorde and Teece, 1990; Brodley, 1990; Shapiro and Willig,
1990]. 6 Thus, it would be useful to begin with an analysis of differences in both vertical and horizontal arrangements (including enforcement) among the Triad members and an assessment of the impact of those differences on performance.
In merger law, which is of increasing importance because of the
large increase in transnational mergers and acquisitions (including
newer modes, such as strategic alliances), there does not appear to be
any difference in substantive law; the language is remarkably similar
in most jurisdictions. The divergence-and conflict-arises in application, since the general prohibition against mergers which will (or
are likely to) substantially lessen competition leaves ample scope for
discretion on the part of the authorities. The situation is even more
complicated in the United States, where all 50 States can exercise
jurisdiction independently from the federal Government. For corporations planning transnational mergers, the degree of uncertainty
created by differences in enforcement of merger law is a major impediment to rational decision-making.
In the area of R&D, a number of policy issues need probing. One
of the most obvious is government subsidies, including sectorally tar6
Sce also Ostry (1990), chapter 3, for a discussion of NCRA as a response to the Japanese innovation paradigm.
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geted tax incentives. The presence of large externalities (that is, benefits that spread beyond the firm to other firms or industries) has long
provided a rationale for government intervention in basic research,
where private firms have little incentive to invest because the benefits
cannot be fully captured (appropriated) in profits. (Another rationale is that pure science is a public good.) But the new debate about
subsidies centres not on basic research, but on the middle ground between basic research and proprietary technology (so-called generic
research), usually involving cooperative arrangements between
firms organized and partly funded by Governments (thus raising, in
addition to the subsidy question, the competition-policy issue mentioned above).
The difficulty of defining this "middle ground" requires a good
deal of analysis and discussion before proceeding to new international disciplines. As experts in innovation have emphasized, this
is because there is no clear-cut boundary between basic research,
generic technology and commercial application (the "linear" model
of innovation), but rather a complex nexus of interaction and feedback (the "simultaneous" or network model of innovation) [Jorde
and Teece, 1990, pp. 76-78; Ziman, 1990]. The extent and nature of
government intervention which affects this more realistic model of
innovation goes well beyond subsidies. Indeed, subsidies may be the
least important factor, as the Japanese innovation paradigm with its
unique "blend of cooperation, competition, and shared information
and objectives" [Ostry, 1990, p. 64] amply demonstrates. So progress on the subsidies front, while certainly important and desirable,
should be seen as only one part of a much broader issue, which is the
impact of government policies on the innovation process.
Finally, there is the thorny question of membership in government-sponsored R&D consortia. There has already been a dispute
over the membership of foreign subsidiaries in the European consortium Jessi and the American Sematech [Ostry, 1990, pp. 66-75]. The
basic reason for the exclusion (seldom spelled out) rests on the concept of strategic industries or technologies. There is no settled definition of that concept and indeed the word "strategic" has multiple
meanings and its use is more confusing than enlightening. One definition of a strategic sector would be one for which an exploitable
advantage for a foreign firm or another country could have serious,
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widespread and long-term consequences. The risks would be especially high if the foreign supplier were a monopoly or a cartel, and
high sunk costs reduced the credible threat of entry [Flamm, 1990].
In such industries, the major means of appropriating returns to
product innovation comes from "first mover" advantage, that is, getting there first and building up continuing and cumulative product
improvement (as in semiconductors, computers, telecommunication, airframes and aircraft engines) [Levin, Klevorick, Nelson and
Winter, 1990]. Thus, the question of how to define "strategic" and
other questions (for example, what is a "foreign" firm or, indeed, is
there a need for a supranational competition authority?) will have to
be confronted before disciplines or codes of behaviour on government-sponsored consortia can be agreed.
In the FDIpolicy sphere, the Uruguay Round of GATT is dealing with a limited aspect of that issue in the trade-related investment
measures (TRIMs) negotiations. Essentially, what is at issue is some
form of discipline on trade-distorting measures, such as performance requirements of one kind or another. With the benefit of hindsight it is now clear that the push for TRIMs by the United States
reflected the world of the 1970s and early 1980s, when there was
widespread hostility in the developing countries to TNCs. The world
of the 1990s will likely be dominated by a competitive bidding for investment as the countries of Central and Eastern Europe and the developing countries seek to supplement their shortage of domestic
savings and technology.
Within the OECD area, the main problem is less likely to be
overt investment inducements (tax holidays, subsidies etc.) than
direct and indirect measures to influence the content or quality of investment, such as local content regulation or rules of origin . 7
Another FDI issue, already evident in the United States, relates to
the ownership of strategic assets (in a national security rather than a
commercial sense). A large number of bills that would constrain
FDI is currently pending in the Congress of the United States.
But the major source of system friction in the investment area
relates to asymmetry of access, or overall reciprocity. Indeed, the
See Ostry [1990, pp. 46-52], for a discussion of the European Community antidumping and rules-of-origin rules.
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United States has announced that it will raise the issue of its "investment imbalance" with Japan in a new round of SII follow-up, citing
the 1989 figures of $32.5 billion of Japanese investment in the United
States versus $1.64 billion of United States investment in Japan.
Within the European Community, the reciprocity question has surfaced in the differences in ease of take-overs (mergers), the chief
mechanism of FDI, among different member countries, especially
the United Kingdom versus Germany. This relates to the fourth
policy issue: financial market regulation as it affects corporate governance.
A recent study prepared for the European Commission [BoozAllen Acquisition Services, 1989] documents the marked differences
in take-over activity in the European Community during the 19851988 period and examines the reasons for those differences, that is,
the obstacles to mergers. Those include a long list of structural differences (especially size and sophistication of equity markets and the
role of banks in corporate ownership and control); and a variety of
regulatory differences (for example, antitrust, company law, labour
law and stock market regulations governing take-overs). Much of
this is also relevant to the Japanese system, which, in a number of
respects, resembles that of Germany. In particular, in both countries, companies are more heavily owned by banks and other
8
corporations.
While some of those differences can be reduced by regulatory
changes (and, indeed, the European Commission will be undertaking to implement a number of these), this study, and numerous
others, have emphasized the structural differences between the
United Kingdom and United States model, on the one hand, and the
German and Japanese model on the other. The differences in composition of ownership, that is, the respective role of share-holders
versus banks (also a reflection of the cultural legacy of countries) will
be much more resistant to change. This is very important because
the composition of ownership has a significant influence on the way
corporations are managed, although the popular image of a clearcut dichotomy between the Anglo-Saxon short-term "financially
8
20
On the Japan-United States comparison, see Kester (1986).
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driven" versus the German-Japanese long-term "industrial growth"
model is too simplistic.
In sum, this complex area of financial markets impacts both on
corporate governance (and, therefore, on competitiveness) . . . and
on reciprocity of access for FDI. There is clearly some scope for
regulatory harmonization, but the structural differences are more
deep-seated and will be difficult to change; as a consequence, the
reciprocity issue is likely to be a continuing source of friction as it is
in goods markets and as it will be in the technology area. Before turning to the reciprocity question, however, the second question needs
to be addressed.
The process of harmonization
The objectives of the process of harmonization in a multilateral
forum would be to:
•
Analyse, for each policy, the differences among countries,
perhaps starting with the Triad;
•
Assess the main impact of those differences on industrial and
trade performance;
• Draw up a mutually agreed set of policy guidelines, a timetable for reform, and a means of monitoring progress
(surveillance).
Those are extremely complex problems and would require
skilled staff assistance in providing objective analysis and information. There is good reason to launch the process as quickly as possible. It would be desirable, in the analytic phase, to include business
representatives and outside experts. The process of promoting
policy convergence itself would require a special intergovernmental
committee.
Because the subject matter covers a number of areas, the effective operation of the committee would involve a greater degree of coordination within national capitals than is customary. But greater
coordination within national capitals is, of course, desirable in and
9
For a discussion of the theoretical issues, see Williamson (1988) and Jensen and
Meckling (1976).
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of itself, however difficult to launch and maintain. In most national
capitals and in the general public there is no real understanding that
the new international arena is within the border. Separating trade
policy from competition policy, R&D, financial market regulation
and so forth only made sense when tariffs were the most important
obstacle to international linkage.
Finally, it is important to emphasize again that, while policy convergence is a desirable objective to pursue in international cooperation, it will not miraculously dissolve all points of international
friction. Different cultural legacies will affect consumer tastes and
preferences and corporate behaviour. National infrastructures (especially education and training) are extremely important, as is macropolicy. And, finally, convergence may reduce but will not eliminate
marked asymmetry of access in the areas of investment and
techology.
Reciprocity' °
The concept of reciprocity underlying GATT is that of a broad
balance of benefits in market access for goods. For a variety of historical reasons, even after more than 40 years of negotiations, there
still exist today some examples of marked asymmetry of access to
markets for goods. This has been a source of considerable political
friction, eroding the commitment to a rules-based multilateral
1
system.'
As noted before, in the case of FDI, there are significant differences even among countries in OECD in ease of access via mergers
(the main vehicle of investment flows). In addition, there are large
differences in the present stock of FDI, with the most marked asymmetry apparent in Japan. 1 2 There would be little purpose in focusing
1 0 For a discussion of the evolution of the concept and of the distinction between the
basic commitment to symmetric rights and obligations in the contract and reciprocity as a
negotiating modality, see Bhagwati [1988, pp. 35-37].
" For a discussion about the reasons for Japan's alleged low import propensity, see
Ostry [1990, pp. 9-10], and references cited therein. The issue of reducing or eliminating
the "special and differential" treatment for the more advanced developing countries has
pervaded a number of negotiating groups in the Uruguay Round.
2 In 1989, the ratio of Japanese investment abroad to foreign investment in Japan
was 23.6, up from 20.6 in 1984. See OECD (1987) and also Terry (1990).
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no. 1 (February 1992)
on the stock issue, however, which is largely the result of past policies, including overt investment barriers, now for the most part dismantled. The issue offlows relates less to overt barriers than to structural characteristics of financial markets and regulatory differences
across a number of different policies. Thus policy harmonization
will narrow the asymmetry over time and an ongoing, multilateral
surveillance process should help contain the political friction stemming from the basic notion of "unfairness", which is at the heart of
the reciprocity debate. This would be facilitated by making the process as transparent as possible through publication of analytical
studies and "progress reports" at ministerial meetings, for example.
The question of reciprocity of access in technology is in some
respects more complex. A firm secures the information necessary to
solve technological problems from many sources. The relevant
knowledge base varies according to the particular technology, and a
distinction can be made between the degree of "publicness" and universality versus "tacitness" and specificity [Dosi, 1988; Nelson,
1990] . 1 3 Scientific inputs are typically public and so is much generic
technology, although to access such inputs requires a sophisticated
base in research and development. But public knowledge is itself
complementary to the more specific and tacit knowledge generated
within the firm. And it is the firm-specific knowledge which results in
new products and processes.
The crucial point in those distinctions in that, with the necessary
investment in research and development, it is easier to access the
public than the tacit part of the knowledge base. If, as in the case of
the United States, the knowledge system is characterized by a much
heavier weight of university-based research and technology than
that of Europe and Japan, that system is structurally more
accessible.
But there are also avenues of access to tacit, specific knowledge:
hiring employees from innovating firms or buying new high-technology start-up firms are examples. Again, in systems where employee
mobility is greater, small start-up firms more prevalent and take-
13
See references cited in Dosi (1988).
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I (February 1992)
23
overs easier, there will be a greater structural accessibility of the nonpublic knowledge base.
Thus, as in the case of investment, structural characteristics of
different systems will generate asymmetry of access to technology. It
will be essential to examine these issues in far greater depth and
search for policies either to reduce or to compensate for differential
access. Moreover, there is one relevant policy issue that could be
tackled more quickly. This concerns the question of membership of
foreign subsidiaries in government-sponsored research consortia
where specific reciprocity conditions could be spelled out as a first
step in dealing with the broader issues raised earlier. The worst way
of dealing with the problem of access asymmetry would be to
attempt to stem the flow of knowledge across borders.
Conclusions
In the present article, a proposal has been put forward for promoting the convergence of a range of policies selected because of
their direct or indirect impact on innovation and competitiveness.
The list is suggestive, not exhaustive. Other candidates could include
the taxation of TNCs; standards and testing procedures in selected
leading-edge sectors; intellectual property norms; and standards and
enforcement procedures to further the convergence process
launched in GATT. The alternatives to promoting convergence are
continuing friction, instability and aggressive bilateralism or an exclusionary form of managed trade.
Finally, such an initiative should be seen as a complement to the
efforts of the Uruguay Round to strengthen GATT. If those efforts
proved successful, and in particular if a World Trade Organization
(WTO) is established, it would be important to ensure that strong informational links are forged between the chosen multilateral forum
and the secretariat of WTO. In the early 1980s, much of the analytical work on trade and investment in services, intellectual property,
investment and agriculture was carried out by OECD, the World
Bank and UNCTC, and proved invaluable in helping launch and
facilitate the Uruguay Round negotiations. Perhaps at the end of the
new harmonization initiative proposed in this article, one could fore-
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see a set of codes developed and then transferred to WTO for
broader application. After all, the basic purpose of international
policy cooperation is to further global integration by extending and
adapting the multilateral rules-based system. ∎
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